Ethereum’s price has plunged recently down to May 2017 levels before its first bull run to a then all-time high of $420, but transaction levels have remained very stable at about 500,000 transactions a day.
In May 2017, ethereum was handling about 100,000 transactions a day. That then spiked to a high of 1.4 million in line with eth’s price increase to $1,420 in January.
Transaction volumes and price then fell, but while price has continued going down for the past few months, transactions have been sidewaying.
This is the first time we’ve notices ethereum’s transaction levels and its price diverging so considerably and for such a length of time.
Studies have shown that ethereum follows Metcalfe’s law of network effects. Price and transaction numbers, therefore, usually correlate as the more transactions, the more users, the more entered or remained in the market, thus the more bought or held rather than sold.
A correlation that clearly can be seen even visibly until recently when price completely diverged from the number of transactions.
Up until about September, the price chart and the transactions chart was pretty much identical. However, what exactly happened after September, besides accusations of Bitmex price manipulation, is not very clear.
One theory might be that ethereum’s price has perhaps “unnaturally” diverged due to a too low ratio against bitcoin, but that just turtles down the question to why is that ratio “unnaturally” low according to network usage indicators.
The answer is perhaps that the bear sentiment in ethereum is higher than in bitcoin. And not just current bitcoin, but higher than bitcoin in 2014 after the MT Gox calamity.
A Proof of Work (PoW) related explanation wouldn’t be satisfactory here because bitcoin’s then inflation and ethereum’s current inflation stand at about the same level.
So the only explanation might be the obvious. Bears have overshot considerably if the future proves it so. They did likewise overshoot in bitcoin 2014 when then too there was a considerable divergence between price and transaction levels.
One can say they overshot more than in bitcoin perhaps because of the Hybrid Casper delay or maybe because the BSV fork turned out far worse than anyone expected, but whether they have indeed overshot remains to be seen.
That’s because one can argue, for example, that ethereum’s price has followed more closely Google searches, but they’ve risen slightly recently while price kept going down.
So it may be that bears have gotten too drunk with the market now perhaps a bit too irrational and at a stage where everyone knows we’re kind of at the bottom, but no one knows where the bottom is exactly. Yet whether that is indeed the case, only time will say.